### Measuring Economic Performance

```Unit 6 Notes
Unit 6, Lesson 1
Notes
 Economists
monitor economic data of the
country using national income accounting –
collects statistics on production, income,
investments, and savings
 This data is collected and presented to the
government and maintained by the
Department of Commerce
 The
MOST IMPORTANT measure that is
collected is GDP – the dollar value of all final
goods and services produced within a
country’s borders in a given year
 The definition itself is worded that each
piece must be looked at individually
 Dollar
value is the total selling prices of all
goods and services produced in a country in a
given year
 Final goods and services are the products
sold to consumers in a given year
 Produced within a country’s borders means
that anything produced in the U. S. is
counted (Kia plant in Ohio)
1.
Intermediate goods – products/services used to
make final products.
a.
b.
2.
Nonproduction Transactions
a.
b.
3.
4.
5.
Ex: Car tires (intermediate good) aren’t counted if they are
going onto a brand new car (final good).
Avoids multiple counting
Transfer Payments (public or private) – money is given for no
service/product. Ex: \$ as a gift, welfare, social security.
Stocks & Bonds transactions
Sale of USED goods
Non-market Transactions
Ex: Time & effort you spend fixing up your car.
Underground Economy – no record exists of the
transaction.
Ex: babysitting, lawn mowing, maid services, drug
GDP Basics:





Always expressed in terms of \$.
Primary measure of economy’s performance.
Calculated using either the expenditure
approach or the income approach.
Increases in GDP are desirable
When the government looks at GDP, the
measurement must be as accurate as possible
 To
calculate GDP, one way is the Expenditure
approach
 Economists estimate the annual expenditures
(\$ spent) on four categories:

Consumer
Government
Net imports/exports

This total equals GDP – practical approach



 Another
way to measure GDP is the income
approach – provides better accuracy
 This approach adds up all the incomes in the
economy (ex. Income from selling a house for
\$115,000)
 Warm
up on worksheet…
Ana Maria began a greeting card company in 2007. She produces
greeting cards for businesses. The year she started, she purchased
all the necessary art supplies and special papers used in producing
her cards. The supplies and papers were all made in the United
States in 2007. She bought used desks and chairs that were made in
She also paid a local advertising company \$10,000 to create ads and
promote her company in business magazines. At the end of the year,
she had \$420 worth of cards still in inventory.
Which items would be counted in determining U.S. GDP for 2007?
-The Greeting Cards Ana sells in 2007?
- The desk and chairs?
- The bookcases?
- Her remaining inventory of cards?
Unit 6, Lesson 2
Notes
 Nominal
GDP is GDP measured in current
prices - GDP unadjusted for inflation or
deflation of prices.


Uses current year’s prices
Real GDP is GDP expressed in constant, or
unchanging, prices - GDP that has been

Reflects price changes so that you may
compare if production increased or if higher
prices simply caused a higher nominal GDP.
(Remember: GDP measures the goods/service
produced in one year.)
 Even
though GDP is the primary economic
measure, others are also taken
 GDP is used to determine other economic
measures including:


GNP
Depreciation
GNP is the annual income earned by U. S.-owned
firms and U. S. citizens
 It is calculated by: GDP + income earned outside
the U. S. – income earned by foreign firms and
citizens inside the U. S. = GNP


GNP does not account for depreciation – the loss
of the value of capital equipment that results
from normal wear and tear
So, GNP – Depreciation = Net National Product (NNP)
depreciation

NNP does not account for another factor that
reflects the cost of doing business – taxes
 So NNP – taxes (sales and exercise) = National
Income (NI)
 We can then figure out how much individuals
make that they can then spend, called Personal
Income (PI)
 So PI = Other household income + Money business
pays out (SS, Income taxes, etc.) – National
Income
 Then, we look at how much a person actually has
to spend after taxes, called Disposable Personal
Income (DPI) = Personal income – taxes


Personal Taxes include income, property, estate,
etc.
Unit 6, Lesson 3
Notes
A
business cycle is a period of economic
expansion followed by a period of economic
contraction
 These are not minor ups and downs – they
are major changes to GDP
 There are typically 4 phases of a business
cycle:




Expansion
Peak
Contraction
Trough
 Expansion
is a period of economic growth
measured by a rise of in real GDP
 In this phase the economy as a whole enjoys
plentiful jobs and a falling unemployment
rate
 Economic growth is a steady, long-term
increase in GDP
 Peak
occurs when GDP stops rising – it has
reached the pinnacle of economic expansion
Contraction occurs after a peak, when the
economy enters a period of economic decline
marked by falling GDP
 Other conditions may like unemployment and
price may vary
 Economists have different terms to describe the
severity of a contraction:

Recession – exists if real GDP falls for 2 consecutive
quarters (6 months) – unemployment normally 6 to 10
months
 Depression – exists if a recession is esp. long and
severe – high unemployment and low output
 Stagflation – exists if real GDP declines (output) and
prices rise (inflation)

 When
the economy has “bottomed-out” it
has reached the trough.
 This is the lowest point of economic
contraction
 GDP stops falling
investment: When the economy is
good, businesses invest in new capital. When
economy isn’t so good, businesses stop
investing and this creates a drop in the
output of other sectors of the economy – can
also begin firing workers
 Interest rates and credit: When interest
rates are low, consumers and business are
inclined to make purchases. When interest
rates are high, they are less likely to spend
money, lowering GDP

Consumer Expectations: When expectations are
that we are in a “good” economy, they expect
higher wages and available jobs – increase in
spending. When expectations are poor,
consumers don’t spend money because they
expect lay-off and lower incomes – can start a
contraction

External Shocks: Negative shocks (drought,
hurricane, oil supply) can cause increase in
prices and a decline in GDP. Positive shocks
(good growing season, finding of new oil supply)
can increase GDP and decrease prices
Unit 6, Lesson 4
Notes
 The
basic measure of a nation’s economic
growth rate is the percentage of change of
GDP over a given period time
 GDP must also keep up with population
growth in order for it to keep being positive
 Taking into account population, most
economist prefer to rely on real GDP per
capita into account

This is the GDP per person in the country
 Real
GDP per capita is considered the best
measure of a nation’s standard of living
 If GDP rises faster than population, the
standard of living will go up
 Economists
can measure the strength of the
economy at any given time by counting the
number of unemployed people
 There are 4 kinds of unemployment:




Frictional
Seasonal
Structural
Cyclical
 Unemployment
always exists, even in a good
economy
 Frictional unemployment occurs when people
take time to find a job
 For example: changing jobs, time to find job
after finishing school, etc.
 In an economy as large as the U. S.,
economists expect to find a large number of
unemployed falling into this category
 Seasonal
unemployment occurs when
industries slow or shut down for a season or
make a seasonal shift in production
schedules
 For example, summer jobs, harvests, etc.
 Economists expect to see people in this
category as well
When the type of economy shifts from one sector
to another, the skills workers need to have a job
also changes
 Workers who lack the necessary skills will lose
their jobs – this is structural unemployment
 There are 5 causes of structural unemployment:

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New technology
New resources
Changes in consumer demand
Globalization
Lack of education
 Unemployment
that rises when the economy
is down and falls when the economy is good
is called cyclical unemployment
 For example – Great Depression (1 out of 4
unemployed) and today’s recession (10%
unemployment)
Unit 6, Lesson 5
Notes
 The
amount of unemployment in the nation
is an important clue to the nation’s health
 Each month, the Bureau of Labor and
Statistics polls a portion of the population
that tracks unemployment
 They compute the unemployment rate:
percentage of nation’s labor force that is
unemployed
 The unemployment rate is a national average
and doesn’t take into account regional or
local differences
 0%
unemployment rate is not possible in a
market economy – 4-6% is normal
 Full employment can occur if there is no
cyclical unemployment
 Inflation
is a sustained increase in the
average price level of a country
 The rate of inflation is measured by the
annual percentage change in the level of
prices as measured by the consumer price
index (measures changes in the cost of living
of a typical household)
 A sustained fall in the general price level is
called deflation – rate of inflation is negative
 CPI
– Consumer Price Index is the quantity of
goods and services that a given amount of
money will buy for a typical household

With inflation, purchasing power will decrease
 With
inflation, prices rise faster than
income, reducing the standard of living
 Real income and buying power will decrease
for an individual
 Quantity
Theory – Too much money in the
economy
 Demand-Pull Theory – Inflation occurs when
demand for goods and services exceeds
existing supplies – prices go up
 Cost-Push Theory – Inflation occurs because
producers increase prices in order to meet
increasing costs

This can lead to the spiral effect – cycle that
keeps repeating
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